Many business founders go into business with a partner (or partners) and set up a private company where each founder is a director and a shareholder. However, it is not uncommon for co-founders’ ideas and interests to diverge at some point. This can also occur in public companies which have many members and a large board of directors. This article unpacks the common issues and procedures surrounding how your company can remove a company director from office.
Firstly, it is important to look at the rules or documents governing your company. These documents may include provisions concerning how to remove a company director from office.
You need to consider:
- whether your company has governing documents, such as a constitution.
- if your company does not have a constitution, then the replaceable rules in the Corporations Act will apply. These rules apply to a company unless the company has modified or replaced them in its constitution; and
- whether your company has a Shareholders Agreement. A shareholders agreement covers issues and obligations that are not included in the constitution.
Public vs Private Company
Do you have a private (proprietary limited) or public (limited) company? Different rules apply to each type of company when it comes to removing a company director from office.
Private companies have the most flexibility when it comes to removing a director. The Corporations Act provides a replaceable rule for the removal of a director. The rule states that a company can remove a director from office by a resolution of the company. A resolution of the company requires a vote carried by more than 50% of the shareholders (members) of the company. Therefore, a shareholder or shareholders who hold 51% or more of voting power can pass the resolution to remove another director even if that other director does not want to be removed.
Your constitution may already include this rule. Alternatively, if you do not have a constitution, this rule will automatically apply. If your company constitution has modified or replaced this rule, then you may be able to remove a director by other means. For example, the company may remove a director by a majority vote of the board of directors.
A public company can remove a director from office by passing a resolution of shareholders. However, unlike a private company, a public company can do so regardless of the company’s constitution or any agreement between the company, the director and its members. However, directors of a public company cannot remove a fellow director, only the shareholders can.
Passing a Resolution
To pass a resolution to remove a director from office, a notice of intention to pass this resolution must be given to the company at least two months before the meeting is scheduled to be held. After the company receives the notice, the company must then give the director a copy of the notice as soon as possible.
In response, this director has a right to put their case to the shareholders by providing a written statement and speaking at the meeting. The company must circulate this written statement to the shareholders.
Importantly, if a company does not follow these rules, it is a strict liability offence. This means that the company will be liable regardless of whether the company intended to break these rules or was reckless or negligent.
Are There Other Ways to Remove a Director of a Public Company?
The company constitution may provide other valid mechanisms to remove a director. However, these mechanisms will only be valid if they do not conflict with the rules set out above in the Corporations Act. For example, there may be ‘self-executing’ provisions in a company constitution that dictate when a director is no longer eligible to hold office.
Once you have established the procedure for removing a director from office, the next step is to call a meeting. This will usually be a meeting of members (shareholders) who need to vote on and pass the resolution. It is important that any meeting is properly convened in accordance with the company constitution and the Corporations Act.
Before taking any action to remove a director from office, you should consult your company’s governing documents such as your constitution and the rules under the Corporations Act. Your company constitution and potentially your shareholders agreement will set out how you can remove a director from office. If there are no governing documents, the procedures will be found in the Corporations Act. Importantly, the rules and requirements differ depending on whether the company is public or private.
If you have any questions about removing a director from office, you can contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.
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